Closing Costs…That’s like my downpayment right?
NOPE. I’m currently working with a friend of mine who’s looking to purchase their first house. Things get very muddy sometimes when it comes to, “What am I actually spending on this house?” and “What am I literally bringing with me when I close on this house?” It’s not particularly clear AND it’s not at all your fault as a buyer – this stuff is confusing!!
There are basically two things you will bring (money-wise) to your closing: your downpayment, which you already planned ahead for you with your lender (at least 3% down for conventional and 3.5% for FHA but up to as much as you’d like)
Your closing costs.
Closing costs?? Isn’t that the downpayment??
Sadly, they’re not. They’re separate. So how much are they and what are they for?
Closing costs basically incorporate a number of other ‘fees’ needed to close the transaction. This includes any fees to your lawyer (title search/insurance, courier fees, etc.), lender underwriting fees (to process your loan), and a pre-payment of generally 6-10 months of local taxes and a pre-payment of one year of homeowner’s insurance. These fees can vary based on the purchase price of the home, but if you’re buying a home between $150,000 and $400,000 (for example), your closing costs will likely range anywhere from $4000 to $15,000. Remember, this is in ADDITION to your down payment. So if your down payment is $20,000, you should really have $35,000 on hand just in case of high closing costs. Your lender and your lawyer would have the best prediction of your closing costs earlier on and will provide you with a full ‘statement’ before your closing date.
Don’t Be Scared!
The point of this blog post isn’t to scare you – it’s just to make you aware that the down payment is not the only money you have to bring to closing and that you just need to be prepared. There is always the option of asking for some closing costs from the seller (up to 3% for conventional loans and 6% for FHA loans). For example, if the purchase price of the home is $200,000 and you’d like 3% back in closing costs (which is $6000) you may change your offer to $206,000 (so the net is still the same to the seller) but now you get a $6000 credit at closing and your closing costs will be $6000 less. Keep in mind, this $6000 is not free and will get added onto your loan (so if your loan was for $200,000 now it’s for $206,000)…but in the long run, that may be an extra ~$22 a month on your loan payments, so it could be worth it to keep some cash in your pocket right now.
This probably sounded complicated, but hopefully it has made you more aware of all the costs you will encounter when completing a home purchase. And again, never hesitate to reach out to your realtor, lawyer, or lender for more information on any of these issues!